The Rolls-Royce (LSE: RR) share price has been on a tear. In the last year, it has skyrocketed a magnificent 178.7%.
This year alone it has been one of the FTSE 100’s top performers, rising 37.6%. Even so, I still don’t plan on buying any shares today.
That may sound odd, especially considering the fact that I like the look of the business. But there are a few reasons I’m holding off for the moment.
Let’s take a step back
First the obvious reason. Right now, the stock is simply too expensive for my liking. It trades on 28.3 times earnings. That’s more than double the FTSE 100 average. I’m cautious that its lofty valuation could provoke a price correction.
Its share price growth has been impressive to witness. But I’m worried the market is getting overexcited and that the rise isn’t sustainable.
In the short run, market hype can dictate a stock’s movement. However, I’m more focused on long-term performance drivers.
It’s the same feeling I have with stocks like Nvidia. While I’m bullish on the outlook of the business in the years to come, there’s the worry that retail investors are getting ahead of themselves and pushing the stock too high. We all know how that can end.
A business I admire
That said, I do like where Rolls is heading. It’s made an impressive comeback from its pandemic woes. At one point, it seemed like bankruptcy might have been on the cards.
Nowadays though, it’s back to its high-flying self. Last year it turned an underlying operating profit of £1.6bn, a 144% increase from the £652m it posted in 2022. Free cash flow also shot up 155% to £1.3bn.
For this year, it expects profits to sit somewhere between £1.7bn and £2bn. CEO Tufan Erginbilgic has publicly discussed the firm’s plans for that figure to rise to £2.8bn.
In all fairness, it seems doable. Especially if Rolls keeps up the momentum that its gained under Erginbilgic through his aggressive turnaround strategy.
Demand for travel continues to soar and this will benefit Rolls. It means airlines are rushing to buy new aircraft. On top of that, it’s also predicted flying hours will exceed 2019 levels by between 20% and 30% over the next few years. With more planes in the sky translating to more money for the business, that will offer a big boost.
What’s more, its defence unit should also be provided with an uplift as spending across the globe rises. For example, the UK announced in February that its defence industry spending topped £25bn for the first time ever.
On the sidelines
Even so, while Rolls has posted strong growth, it will be incredibly difficult to sustain it moving forward.
I’m waiting on the sidelines at the moment. But I’m watching the Rolls-Royce share price like a hawk.
I won’t be drawn into the market hype. Instead, if Rolls pulls back to what I believe to be a more sensible price, then I’ll make a move.
This post was originally published on Motley Fool
